BUCHAREST (Romania), March 9 (SeeNews) – Fitch Ratings has announced that it has assigned Romania’s state-owned savings bank CEC an initial long-term issuer default (IDR) rating of “BB” with a stable outlook.
Fitch has also assigned CEC Bank a viability rating (VR) of “bb” and a government support rating (GSR) of “b”, the global rating agency said in a press release on Tuesday.
CEC’s IDR and VR reflect the bank’s moderate but strengthening business profile, strong capitalization and reasonable funding and liquidity profile, which offsets weaker-than-industry asset quality and profitability, a said Fitch.
The bank’s risk profile is commensurate with its relatively simple business model, with underwriting standards broadly in line with national industry standards, but with somewhat decentralized loan approval coupled with relatively unsophisticated risk controls , according to the rating agency.
Fitch also said in the statement:
“CEC is a medium-sized commercial bank in Romania (ranked seventh in terms of assets), fully owned by the Romanian state. The bank has a market share of approximately 7.9% of sector assets at the end of 2021 , and lending and a slightly higher market share in customer deposits.The bank operates a traditional universal banking business model with lending oriented to the non-commercial segment, including significant exposure to public sector entities, financed largely by deposits from retail customers The strength of the bank’s franchise is reinforced by an extensive network of branches outside the major cities, where competitive pressure is all the less as a greater part of the population is underbanked, which allows the bank to generate a good level of commission income, despite a fairly basic product range.
CEC’s capitalization is a ratings strength underpinned by its high capital ratios, modest capital charge due to unfunded impaired loans and reasonable risk profile. At the end of 3Q21, the bank’s common equity Tier 1 (CET1) ratio stood at 22.3%, but is expected to decline to around 18% by the end of 2021, given the large dividend declared at pay on 2020 and 2019 earnings, and the impact of the negative sovereign debt revaluation on the bank’s capital. CEC maintains strong buffers above minimum regulatory requirements. The regulatory capital ratios will be further supported by eligible Tier 2 subordinated debt (equal to approximately 7.2% of risk-weighted assets; RWA) recently issued to the State and intended to also cover the objectives of the bank’s intermediate resolution requirement. We expect the bank to operate with slightly higher capital ratios than its peers, in part due to a more difficult owner capital injection process, given state aid.
CEC’s asset quality is weaker than its peers, largely reflecting problem loans in its large corporate/SME loan portfolio, with a significant portion of some inherited bad debt. The bank’s impaired loan ratio was around 6.1% at the end of 3Q21, compared to an industry average of around 3.8%. Coverage of problem loans is reasonable (although lower than peers) and has grown steadily over the past five years, with total provisions covering nearly 80% of impaired loans. We expect the bank to continue to strengthen its provision coverage and resolve bad debts inherited from the past. However, the improvement in asset quality metrics will only be gradual, given the bank’s plans to be increasingly competitive in the higher-risk, higher-margin unsecured retail lending segment.
Profitability is moderate, reflecting the structure of the loan portfolio, which is dominated by low-margin non-retail loans and mortgage loans. In 9M21, the bank’s operating profit to RWA improved moderately to around 2.8% from around 2.4% in 2020, largely reflecting lower loan impairment charges, while net income suffered due to pressure on the net interest margin. The bank’s strategy to continue to increase more profitable retail unsecured lending will be positive for profitability, but significant investment is needed to accelerate the lagging digital transformation. Combined with a normalizing loan impairment charge, this means that an improvement in profitability is unlikely in the short to medium term.
CEC’s funding and liquidity profile is reasonable, reflecting its large liquidity cushion and potential ordinary support from owners. Liquidity is solid, covering the bank’s modest refinancing needs well, while regulatory liquidity ratios remain well above minimum requirements.
The bank has a stable and granular deposit base, which underpins its good gross loans to customer deposits ratio (around 67% at the end of 3Q21). Despite the ratio, we consider its deposit allowance to be just moderate as it relies on more expensive term deposit funding due to its weaker customer relationships. This situation is somewhat mitigated by less competition from other Romanian banks in the regions where CEC mainly operates. The bank’s non-deposit funding is largely made up of subordinated debt issued to the state at the end of 2021. It plans to further increase its non-deposit funding.
CEC’s GSR reflects Fitch’s view that there is a limited likelihood that extraordinary support will be provided to CEC by the Romanian state (BBB-/Negative), its 100% owner. We consider the likelihood of such support to be reduced by the Bank Recovery and Resolution Directive and the Single Resolution Mechanism, which limit the possibility for banks to be supported without the bail-in of senior creditors. Our view of the potential support available to the bank is based on direct, full and voluntary state ownership and the bank’s significant presence in underbanked regions of Romania.
Factors that could, individually or collectively, lead to a negative rating action/downgrade:
– The stable outlook on CEC’s ratings reflects the large rating margin. The most likely cause of a downgrade in the bank’s ratings would be if its capitalization metrics weakened significantly from our baseline expectation of around 18%. This could occur in particular due to significantly faster than expected loan growth not accompanied by an improvement in internal capital generation, the continuation of large capital distributions or a weakening in the quality of the assets of the bank, which would signal a deterioration in the bank’s risk profile.
– CEC’s VR and IDR could also be downgraded in the event of a sharp deterioration in the operating environment in Romania, although Fitch believes this risk is currently low.
– GSR could be downgraded if the sovereign’s ability or propensity to support the bank weakens.
Factors that could, individually or collectively, lead to positive rating action/improvement:
– An improvement in the bank’s ratings is unlikely in the short term, given its business profile and market position. We could upgrade the ratings if the bank posts a record of sustained improvement in earnings and profitability, underpinned by a structural improvement in its business profile, while converging its asset quality measures towards its domestic peers.
– IDR and VR could also be improved if the operating environment was improved and the bank maintained a resilient credit profile.
– A revaluation of the bank’s GSR would be conditional on a positive change in the sovereign’s propensity to support the bank. While not impossible, it is highly unlikely, according to Fitch.
The operating environment score of “bb+” was assigned below the implied score, due to the following adjustment: Macroeconomic stability (negative).
The asset quality score of “bb-” was assigned above the implied score due to the following adjustments: Formation of impaired loans (positive).
The capitalization and leverage score of “bb+” was assigned below the implied score due to the following adjustments: Historical and future metrics (negative)
BEST/WORST CASE EVALUATION SCENARIO
Global credit ratings of financial institutions and covered bond issuers have a best-case scenario for a rating upgrade (defined as the 99th percentile of rating transitions, measured in the positive direction) of three notches out of a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured negatively) of four notches over three years. The full range of best-case and worst-case credit ratings for all rating categories ranges from “AAA” to “D”. Best and worst case credit ratings are based on historical performance.”
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CEC Bank SA is one of the largest banks in SEE, for more reference take a look at Top 100 Banks